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HERE IS THE TEXT YOU CAN SEE.
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HERE IS WHERE YOU PLACE THE HIDDEN TEXT.

Correct the Journalist

I found this article from March 2008, in which business writer John Wilen writes:

Q: If people are driving less, why do gas prices keep rising?
A: People are indeed driving less. Gas consumption has fallen about 1 percent since late January.
Yet, gas prices are on the rise. Gas has averaged more than $3 a gallon for four straight months and, more recently, has surged into record territory. Estimates of how high gas prices will go this year vary from $3.50 a gallon to $4. But virtually everyone agrees prices have higher to go before they fall.
This disconnect between demand and price may seem to violate fundamental rules of economics, but gas prices are actually responding to demand of a different kind: From investors.
...
Unfortunately, consumers pay for this investment frenzy in the form of higher pump prices. And despite mounting evidence that Americans are cutting back on their gasoline habit — and may cut back even more drastically as gas gets more expensive — it may be some time before prices start responding to lower demand.

His explanation regarding speculation is correct as far as one possibility goes, but there is an error in the last paragraph, and 3 other possible supply and demand explanations for why the relationship (price going up and quantity going down) is being observed.

Identify the error and the 3 possibilities. The answer is in the comments.

Unintended Consequences of CAFE

From the Wall Street Journal on the "corporate average fuel economy" rules of the 1970s:

Look at gallons consumed, miles driven, barrels imported or emissions emitted: CAFE has had no significant impact on energy consumption. Its sole practical effect has been to inflict on Detroit the need to produce, with high-cost U.S. labor, millions of small cars designed to lose money.

CAFE has to be the most perverse exercise in product regulation in industrial history. It confronted the Big Three with the choice only of whether to lose a lot of money, by matching Toyota and Honda on quality and features; or somewhat less money, by scrimping on quality and features and discounting, discounting, discounting. Rationally, they scrimped -- and still live under a reputational cloud in the eyes of sedan buyers. Yet notice that their profitable product lines, in which they invest to be truly competitive -- such as SUVs, pickups and minivans -- hold their own against the Japanese and command real loyalty among U.S. consumers.

Had CAFE not existed, there is no reason the Big Three today could not be competitive. As businesses do, they would have allocated capital to products capable of recovering their costs. Investments in fuel efficiency would still have taken place -- to the extent consumers valued those investments. That is, if they were profitable.

If Washington found this unsatisfactory, it could have done as the Europeans do and raised fuel taxes to coax the public to make different choices. Politically inexpedient? Well, yes, but that doesn't mean CAFE is an effective substitute. It isn't and never was.

Do read the whole thing, it is interesting throughout.

v517 Fall 2008: Homework 1

Homework 1 covers "How Markets Use Knowledge" by Russ Roberts. Answer the 6 questions at the end of the article and turn it in by the beginning of class on Monday, September 15.

If and when questions are brought to my attention, you can find the question and my response in the comments of this post.

Spot the Error in Supply and Demand Logic

Pick out the error presented in this CNN article covering a study given to Congress, the answer is in the comments.

According to the study, investors poured $60 billion into oil futures markets during the first six months of the year as oil prices soared from $95 to $145 a barrel. Since then, investors have withdrawn $39 billion from those same markets as prices have retreated.

Michael Masters of Masters Capital Management, which did the study, said the flow of money - not major changes in supply and demand - caused the volatile movement of oil prices. The report was released Wednesday by Senate and House sponsors of bills to put additional curbs on oil market speculation.

Camels and Gas

As oil (and gas) prices rise, those in India are switching to camels instead of driving their cars:

“It’s excellent for the camel population if the price of oil continues to go up because demand for camels will also go up,” says Ilse Köhler-Rollefson of the League for Pastoral Peoples and Endogenous Livestock Development. “Two years ago, a camel cost little more than a goat, which is nothing. The price has since trebled.”

The economics of it then...how does a increase in the price of oil lead to an increase in the price of camels?

1. The price of oil increases.
2. Oil is a complement good for cars.
3. Demand for cars falls, putting downward pressure on car prices.
4. The falling car prices do not offset the rising cost of driving the car.
5. There is an increase in demand for substitute means of transportation, including camels.
6. The price of camels increases.

Hat Tip: Kids Prefer Cheese.

EC 201: Homework 4

Due Sunday at 11:45 p.m. on Alia. View the comments for Q&A.